Think there is no time left to plan for saving federal income taxes for 2003? Not so. You still have time to review your income-tax situation to see where you stand and what you can do to save taxes. Here are several strategies that may reduce your 2003 federal tax bill.

Tax Rates

Due to the tax law enacted earlier this year, income tax rates for those in tax brackets higher than 15% have been cut, the so-called “marriage penalty” has been reduced, the child tax credit has been expanded, and the alternative minimum tax exemptions have been increased. All of these changes (and others) should result in a lower tax bill for 2003 than under prior law.

Itemized Deductions

If you expect to itemize your deductions on your 2003 return, think about paying deductible expenses before the end of the year to lower your 2003 taxes.

Deductible Interest. Consider making your January 2004 mortgage payment (which includes December’s interest) in late December 2003, so that the interest will be deductible on your 2003 return.

Medical and Miscellaneous Itemized Expenses. Your deductions are limited to the amounts that exceed 7.5% of adjusted gross income for medical expenses and 2% of adjusted gross income for miscellaneous expenses. Bunching two years of your or your family’s unreimbursed medical or miscellaneous itemized expenses (such as certain job-related expenses and investment expenses) into one year may allow you to surpass the deduction floors and help you gain a deduction for a portion of your expenses.

And don’t forget that the IRS has recently added to those medical expenses deductible for tax purposes items such as certain types of corrective surgery (laser eye surgery, for instance), as well as the unreimbursed cost of nonprescription supplies (such as crutches and bandages) and diagnostic devices (such as blood sugar kits for diabetics). Contact us for more information.

Charitable Contributions. If you are planning to make a charitable donation in early 2004, consider a 2003 year-end donation instead. Contributions charged on your credit card in 2003 count as 2003 deductions, even if you don’t receive or pay the credit card bill until 2004.

Taxes. If you pay quarterly estimated state income taxes, consider paying your last 2003 estimate before December 31, so that it will be deductible on this year’s tax return. Employees who have state income taxes withheld from their pay may wish to increase the amount withheld from their remaining 2003 paychecks to cover any projected underpayment.

However, if you are a high earner facing a limitation on your itemized deductions or if you expect to be in a much higher tax bracket in 2004, accelerating these payments into 2003 may not be your best course of action. In addition, if you claim too many deductions in 2003, you may be subject to the alternative minimum tax. See us for more details.

Tax Deferral

Review any opportunities you may have to push taxable income into a later tax year. Deferral strategies are especially effective if you expect to be in the same or a lower tax bracket in the year in which you will be reporting the income on your tax return. Any of these strategies may help cut your 2003 taxes:

• Ask your employer to defer paying your 2003 year-end bonus until early 2004.

• Maximize 2003 contributions to any tax-deferred retirement savings plan in which you participate, such as a 401(k) plan or a 403(b) tax-sheltered annuity.

• If you are self-employed and use the cash method of accounting for income-tax purposes, time late 2003 customer billings so that payment won’t be received until 2004.

Self-employed business owners who do not already have a tax-deferred retirement plan should consider starting one before year-end. Options to examine include a so-called “solo 401(k)” plan, a Simplified Employee Pension (SEP) plan, or a SIMPLE 401(k) plan. We would be happy to discuss the advantages and restrictions of each type.

New Business Tax Breaks

Make sure to take full advantage of the new business growth incentives that were introduced or expanded with this year’s tax legislation. Included among these provisions is the ability to write off up to $100,000 of the cost of qualifying business assets in the year of purchase (rather than depreciating the assets over time). A second provision allows businesses to claim bonus first-year depreciation of 50% of the cost of qualifying new assets. See us to learn about the requirements you need to meet to take advantage of these tax breaks.

Investment Strategies

Do you have any investments with paper losses? If you are thinking about selling any of your poor performers before the end of the year, remember that capital losses offset the capital gains you may have realized and any net loss is deductible against up to $3,000 of ordinary income per year.

Consider selling appreciated stock or other investments you have “paper gains” on before year-end to absorb any capital losses that exceed $3,000 per year. If this is not desirable, any unused capital losses may be carried forward for deduction in future years, subject to limitations.

Remember, too, that the maximum tax rates on 2003 dividends and net long-term capital gains realized after May 5, 2003, have dropped to 15%.

Of course, taxes are just one factor to consider in making an investment decision. Please contact us if you would like us to evaluate the tax effect of any proposed transaction.

Can We Help?

Keep in mind that the suggestions we make here are general strategies only. They may or may not be appropriate for your particular circumstances. We’re ready to provide you with personal and business year-end tax planning assistance. Call us for an appointment to review your specific situation.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.